Risks covered - Rule 38: Pollution

Rule 38 Pollution

a liabilities, costs and expenses (excluding fines) arising in consequence of the discharge or escape from the Ship of oil or any other substance or the threat of such discharge or escape;

b liabilities, costs and expenses incurred by the Member pursuant to any agreement approved by the Association for the purpose of this Rule.

2 A Member insured in respect of a Ship which is a ‘relevant ship’ as defined in the Small Tanker Oil Pollution Indemnification Agreement, including any addendum to, or variation or replacement of such agreement (STOPIA) shall, unless the Association otherwise agrees in writing, be a party to STOPIA for the period of entry of the Ship in the Association. Unless the Association has agreed in writing or unless the Association in its discretion otherwise determines, there shall be no cover under this Rule 38 in respect of such a Ship so long as the Member is not a party to STOPIA.

3 A Member insured in respect of a Ship which is eligible for entry in the Tanker Oil Pollution Indemnification Agreement, including any addendum to, or variation or replacement of such agreement (TOPIA) shall, unless the Association otherwise agree in writing, be a party to TOPIA for the period of entry of the Ship in the Association. Unless the Association has agreed in writing or unless the Association in its discretion otherwise determines, there shall be no cover under this Rule 38 in respect of such a Ship so long as the Member is not a party to TOPIA.

Guidance

For more detailed commentary see Chapter 12 of theGard Guidance on Maritime Claims and Insuranceand theGard Handbook on Protection of the Marine Environment, 3rd edition 2006.

(A) Explanatory remarksOver the past four decades major marine pollution incidents have affected the regulatory environment of the shipping sector on a steadily increasing scale. Historically, most marine pollution cases have involved ship-source spills of oil products. Consequently, international conventions, such as MARPOL,1have been developed to protect the environment from such pollution. Additionally, other international conventions, such as the CLC,2have been developed in order to regulate shipowner liability as well as to ensure the prompt and efficient payment of compensation to those that have been affected by such pollution. Over the years, the scope of international regulation has been significantly broadened to encompass ship-source spills of substances other than oil carried as cargo, such as bunker oil from all types of ship,3as well as hazardous and noxious substances which may threaten human life and the environment.4Furthermore, conventions have been periodically reviewed and amended, as a result of which the limits of liability that apply in respect of pollution damages have been substantially increased.

Therefore, liabilities in respect of pollution have become one of the most important areas of P&I cover, both in terms of the amounts paid and the coverage needed. The provisions of Rule 38 reflect the position taken by the P&I clubs that the scope of the cover that is available for liabilities, costs and expenses arising as a result of ship-source pollution incidents ought to be broad, because the majority of such incidents are accidental and Members need adequate protection against the, sometimes, severe financial consequences that are applicable.

Whilst the Association is normally obliged to indemnify the Member only where he has firstly paid or otherwise discharged his third party liability,5this is frequently not so in the case of pollution liability. The CLC and Bunker6Conventions both require the shipowner to arrange and provide evidence of insurance or other financial security for his potential liability, and for his flag state to approve and attest to such insurance or other financial security. The Association will certify that such insurance is in place7and by doing so, the Association will thereby incur direct liability to third party claimants8for the pollution damage for which the shipowner is liable under those conventions. It is also increasingly the case that, irrespective of whether or not a pollution incident requires a clean-up operation, the local authorities may impose a fine on the shipowner/ operator, or the master, or sometimes both. This issue is covered more fully in the guidance to Rule 47.

(B) Pre-conditions for cover under Rule 38The following pre-conditions for cover apply:

i the pollution liability must have occurred in direct connection with the operation of the entered Ship.9For example, if there is an oil spill from the Ship during loading at the Member’s own terminal, cover is available for the resulting liabilities.10On the other hand, cover would not normally be available for liabilities that arise as a result of a spillage from a terminal pipeline rupture since there would not, in such circumstances, have been discharge ‘from the Ship’. However, if the Ship is adjudged to be liable for the terminal pipeline rupture due to over-pressure emanating from the Ship’s pumps, cover is available for such liability. Similarly, cover will not be available in circumstances where the oil or other substance is no longer in the possession of the Ship and subsequently causes pollution, e.g. where oil or chemical waste delivered by the Ship to a shore reception facility escapes from that facility;11

ii the pollution liability must have arisen in respect of the Member’s interest in the entered Ship.12For example, if pollution liability is imposed on the charterer of the Ship (who has effected a Charterer’s Entry for the Ship in the Association) in his capacity as owner of the oil cargo that has caused the pollution damage, cover is not available for such liability because it resulted from the Member’s interest in the cargo13and not in the Ship;

iii the pollution liability must have arisen as a result of an event that occurred during the period of entry of the Ship.14For example, if the Ship has sunk or becomes stranded with ‘oil or any other substance’ on board and is accepted by her hull underwriters as a Constructive Total Loss (CTL), the P&I cover that the Member has in respect of the Ship will automatically cease on the occurrence of that event.15In such circumstances, cover is available for liabilities that arise as a result of incidents that occur prior to such termination even if the consequences of the incident are not experienced until after the termination, but cover is not available for liabilities that arise as a result of incidents that post-date such termination. Therefore, cover is available for liabilities incurred by the Member for pollution from the stranded or sunken ship due to seepage from damaged cargo or bunker tanks since such liabilities are considered to flow from16the casualty or incident that caused the total loss of the Ship. However, although the Association has no liability for incidents that arise after termination of the entry,17the authorities in some countries are entitled by law to hold the shipowner liable for pollution emanating from a wreck, even though the owner may have sold the wreck to a third party prior to the occurrence of the pollution. Therefore, although the owner may have a right of recourse against the third party under the contract of sale of the wreck, the owner will almost certainly have to respond to the authorities’ demands. Consequently, cover will normally remain available for liabilities that are incurred by the Member pursuant to such demands by the authorities;

iv the Member is always required to make use of whatever rights that are available to him to limit his liability under any applicable rule of law,18e.g. pursuant to the CLC, and to take diligent and proper steps to defend himself against unfounded and exaggerated claims;19

v in order to qualify for cover under Rule 38.1, the Member whose Ship is either a ‘relevant ship’ as defined in STOPIA,20and/or is eligible for entry in TOPIA,21must be a party to STOPIA and/or TOPIA (which acronyms include any amendment or variation or replacement thereof that may be made from time to time during the Policy Year) for the period of entry of the Ship in the Association. The Association will automatically enter all relevant Ships in the then current version of STOPIA and/or TOPIA on behalf of the relevant Members but cover is not available under Rule 38.1.a or Rule 38.1.b if the Member decides not to be a party to STOPIA and/or TOPIA unless the Association agrees in writing that cover is, nonetheless, available or, in the absence of such written agreement, exercises its discretion22in exceptional cases to determine that cover shall be available. Further guidance relating to STOPIA and TOPIA is given in paragraphs (I), (J) and (K) below;

vi the cover that is available under Rule 38 for oil23pollution is subject to the important limitation provisions that are set out in Rules 53.1 and 53.2, as well as in Appendix III that is referred to therein. The overall limit of cover for all claims in respect of pollution is USD 1 billion each incident or occurrence each Owner's Entry and is further subject in the case of claims in respect of pollution made against a charterer that is a co-assured under an Owner’s Entry;

vii where the Member has cover for the relevant liability under any other insurance, the P&I cover will be subsidiary to that (or those) insurance(s).24

(C) The scope of cover under Rule 38Cover is available under Rule 38 for liabilities that the Member incurs pursuant to international convention, national statute or common law principles.25However, cover is not available for liabilities that arise solely by virtue of the terms of a contract or agreement unless those terms have been approved by the Association.26

There is no uniform regime which regulates pollution liability in all countries of the world.27However, many countries have ratified the CLC 92 which regulates liability and compensation for pollution emanating from tank ships, and many countries have also ratified the Bunker Convention.28Other countries merely enforce local legislation29with the result that the Member’s liability exposure can be significantly different depending on where claims for pollution damage are made against him.

Shipowners and charterers may also have no choice but to accept for commercial reasons contractual terms relating to pollution liability that are more onerous than those which would otherwise apply under any applicable law. See further Guidance to Rule 38.1.b under (I) in this regard.

Moreover, in order to preserve the intended cost allocation between the shipping and oil industries under the CLC and Fund Conventions, shipowners, with the support of their P&I clubs, have agreed to indemnify the International Oil Pollution Compensation Fund and Supplementary Fund,30for certain liabilities that would otherwise have been borne by those Funds. See further Guidance to Rule 38.2 (STOPIA) and Rule 38.3 (TOPIA) under (J) and (K) below in this regard.

(D) ...shall cover...liabilities, costs and expenses (excluding fines)... (Rule 38.1)Rule 38.1 makes cover available for liabilities, costs and expenses that arise as a result of the actual or threatened discharge or escape of oil or any other substance from the Ship. Whilst the word ‘pollution’ is not expressly used in the Rule, cover is available if:

a oil or some other substance has been discharged or has escaped from the Ship, or there is a threat of such discharge or escape; and

b as a result of (a), the Member or the Association incurs a legal liability to pay compensation or damages to third parties that have been affected by the incident, and/or incurs liability for costs or expenses which have been incurred in order to prevent and/or clean-up the pollution and/or to restore the polluted areas.

Cover is available for e.g.:

i Costs and expenses that are incurred by the Member in order to prevent pollution damage following a spill, or to clean up and restore polluted areas and property in circumstances where the Member has a legal liability to incur such costs and expenses;

ii Costs and expenses to which reference is made in (i) that are incurred by third parties in the first instance, but in circumstances where the Member is legally obliged to indemnify those third parties, e.g. public authorities in the country or state affected by the spill which have undertaken pollution prevention, clean-up, restoration and monitoring measures;

iii Third party loss or damage caused by physical contamination of property, e.g. the soiling of recreational boats or fishing nets, or the clogging of water intakes to a production facility, or economic losses incurred as a result of such events regardless of whether or not the claimants have been directly affected by contamination, e.g. fishery and tourism losses, as well as damage or losses caused by clean-up and restoration activities;31

iv Damage to natural resources, e.g. beaches, mangroves, marshlands, coral reefs and their wildlife flora and fauna habitats, for which the Member is liable under the applicable law to incur restoration costs and/or pay damages32in respect thereof to authorities, trustees or other parties.

The cover that is provided under Rule 38.1.a expressly excludes fines. However, cover in respect of fines and penalties may be available under Rule 47.1.c.

As noted above, the Association may have a direct liability to pay compensation, costs and expenses for pollution liability that has been incurred by the Member pursuant to the CLC or other similar conventions by virtue of the fact that it has provided certificates evidencing the insurance of such liability. Pursuant to the terms of such certificates and the CLC, the Association will be liable to third parties to the same extent that the shipowner would have been liable had the claim been made against him. However, although the Association is entitled to invoke the same defences33and limitation rights that would have been available to the shipowner pursuant to the CLC, it cannot use as a defence against third party claims the fact that the Member is in breach of the terms of entry, e.g. with regard to his duty of disclosure under Rule 6, except where the liability or loss has been caused by the wilful misconduct of the Member.34The certificates that the Association provides pursuant to the CLC to evidence insurance cover are wider in scope in certain respects than the scope of cover that is otherwise available under the Rules. For example, notwithstanding the provisions of Rule 58, the certificates oblige the Association to pay compensation for pollution claims that have arisen as a result of terrorism.35

(E) ...arising in consequence of the discharge or escape... (Rule 38.1.a)The majority of recoverable claims that are made against a Member involve clean-up costs and/or damage to the property of third parties caused by the discharge or escape from the Ship of oil carried as cargo or as bunker fuel.

The term ‘discharge’ includes not only incidents that occur during the course of planned discharge operations but also unplanned and accidental discharges that occur (usually as a result of negligence) during normal discharging operations or other operational activities on board. For example, liability may occur if an oil spill is caused by the inadvertent detachment of a hose at the Ship’s manifold during the course of pumping ashore. Depending on the circumstances, such a‘discharge’may also be considered to be an ’escape’ of oil, i.e. the unintentional release of oil or another substance from the Ship. However, an ’escape’ could also occur following a breach of the crude oil cargo tanks as the result of a grounding incident, or a spill of heavy or other fuel following the breach of bunker tanks as a result of a collision. Cover is available for liabilities that arise as a result of both such incidents.

(F) ...from the Ship... (Rule 38.1.a)The oil or other substance must have been discharged or escaped from the Ship. If the Ship receives bunker oil in port from a tank barge and oil is spilled from the barge, there is no escape of oil from the Ship and, therefore, cover is not available under Rule 38.1.a. Nonetheless, the owner may still be liable for the mishap under contract and, if so, cover may be available under Rule 38.1.b. (See (I) below)

Cover is not available where liability is incurred as a result of pollution caused by the presence, discharge or escape of oil or other substance that was either (a) previously, but is no longer, in the possession of the Ship or (b) from a source other than the Ship. Such other source could be, for example, a land based dumpsite, storage or disposal facility that has received waste oil or other substances from the Ship.36The reason why cover is not available in such circumstances is that the liability has not arisen directly in connection with the operation of the Ship, which is an overriding pre-requisite for cover pursuant to Rule 2.4.a. Furthermore, the liability may not have arisen during the period of entry of the Ship, which is a requirement pursuant to Rule 2.4.c. If the Member, nonetheless, incurs liability in respect of the presence of, or the subsequent discharge or escape of oil or other substance from a landfill site, the Association may make cover available by the exercise of discretion37pursuant to Rule 62.2.

For the purposes of Rule 38, the substance giving rise to liability must have escapedfromthe Ship. Therefore, cover is not available under Rule 38 if the polluting substance is the Ship itself or any part of it, e.g. if the wreck38of the Ship is considered pollution under the applicable law. However, cover is available if toxic or other polluting chemical cargoes, or other cargo that is deemed to be a pollutant and carried in containers on deck, are lost overboard.

(G) ...of oil or any other substance... (Rule 38.1.a)The term ‘oil’ includes persistent and non-persistent types of oil. However, for the purpose of Rule 38, the term ‘oil’ is less important, because cover also applies to the discharge or escape of ‘any other substance’, which is a term that is much wider in scope. The intention is to provide broad cover for pollution liabilities arising from ship-source spills, and includes,inter alia,cargo carried, hazardous and noxious substances (HNS),39garbage, sewage, oily bilge water, waste, debris as well as soot emitted through the ship’s funnel. However, the cover that is available for liabilities arising as a result of the carriage of nuclear substances is substantially restricted in scope.40

Cover is available although the substance giving rise to liability may not be classified as a pollutant or as a hazardous or noxious substance. It is sufficient that the discharge or escape of the substance has given rise to a legal liability for pollution under the law of the jurisdiction(s) where the incident and/or damage occurred.

(H) ...or the threat of such discharge or escape... (Rule 38.1.a)Cover is also available for liabilities, costs and expenses that arise as a result of the ‘threat’ of a discharge or escape. Such a ‘threat’ will be deemed to exist when pollution damage is likely to occur if no measures are taken to reduce the risk of damage. However, cover is also available where the Member is liable under the applicable law to reimburse local authorities or other parties for preventive measures that they have taken in order to avoid or reduce the risk of pollution, whether or not, objectively, a threat of pollution existed. For example, the Ship may suffer a grounding incident in close proximity to a busy port. Although it is not clear that cargo and/or bunker tanks have been, or will be, breached, the port authorities may decide to place booms around the Ship and to mobilise oil recovery vessels to stand by. If the authorities make a claim for reimbursement of these costs and expenses from the Member, and the Member is liable to pay such reimbursement under local law, cover is available under Rule 38.

Cover is also available where the Member, in similar circumstances, is requested by local authorities to take preventive measures and is at risk of incurring liability, including that of penalties that may be imposed by the authorities, if he does not comply with such request. However, before confirming that cover is available in such circumstances, the Association will assess whether the costs and expenses incurred by the Member were reasonable, taking into account the nature of the request and the consequences of any non-compliance.

The above situations must be distinguished from those where the Member, independently and voluntarily, takes preventive action and thereby incurs costs and expenses. In such circumstances, the Association will then assess whether the actions that were taken were taken against a threat of pollution that was real. The Association will also consider whether the costs and expenses that were incurred were reasonably and necessarily incurred because of that threat and not for any other purpose, such as the protection of the Member’s reputation, or the protection of his general business interests, since, in such circumstances, the Member would not be able to satisfy the overriding condition for cover in Rule 2.4. Therefore, Members are encouraged, where time permits, to consult the Association prior to incurring costs and expenses for which they intend to seek recovery from the Association.

Finally, there are situations where, regardless of whether or not action has been taken by the Member in response to a request to do so from the authorities, it cannot be said that there was, or is, a threat of pollution from the Ship. For example, the fouling of a cargo hold inside the Ship as a result of a leakage from a bunker tank through a crack in the tank top is unlikely to cause pollution damage outside the Ship if the external structure of the Ship is intact. Similarly, cover is not normally available where oil is spilt on deck and has to be cleaned up by the Crew before the vessel is allowed to leave port. This is because, again, such a spill does not normally create a risk of an escape of oil from the Ship. Each case is assessed on its own facts, but generally speaking, cover for costs incurred in order to clean the hold, or the deck or dispose of oily waste is not normally available under Rule 38.1.a in such circumstances.

The location of pollution damageCover is available for pollution damage to both the marine and the non-marine environments. Typical marine environments are coastal shorelines, tidal zones, estuaries, riverbanks, ports, inland waterways, as well as resources in the water column and on the seabed. The non-marine environment includes not only property and resources that is/are located inland41but also the atmosphere, which can be damaged, e.g. by the release of air pollutants, such as chemical cargo vapours or soot exhaust.

It should be noted that pollution damage may affect more than one country, and that, therefore, the law of more than one country may apply when determining liability and damages. However, this does not affect the scope of cover.42

Pollution and hull insurance

Certain liabilities, costs and expenses arising as a result of incidents that cause pollution may be covered under the Ship’s Hull Policies, and if so, P&I cover will not be available for such liabilities, costs etc.43 For example, under both the Nordic Marine Insurance Plan44 and ITC Hull terms,45 contamination of the hull by oil is considered as ‘damage’ covered under standard hull and machinery conditions. This means in practice that if the Ship is fouled by oil or any other substance having escaped from the Ship or any other ship or other source, cover for the cost of cleaning the Ship is to be provided by the Ship’s Hull Policies. Likewise, the removal from the Ship after a collision incident of oil or other substances originating from the other ship may be considered a necessary measure to facilitate repairs to the Ship. Another example would be costs incurred in cleaning the hull of the other ship after a collision if the collision liability of the Ship is cover that should be provided by the Ship’s Hull Policies.46

Although the cleaning of the Ship in such circumstances is normally considered to be a hull risk that is to be covered by the Ship’s Hull Policies, such cleaning costs may nevertheless be recoverable under the Ship’s P&I policy if the risk of pollution is severe and critical.47 In such cases, the cost of cleaning the Ship’s hull may be treated as a P&I claim if the criteria are met for compensating extraordinary costs and expenses incurred on or after the occurrence of a casualty or event for the purpose of avoiding or minimizing a liability on the Association.48 This will typically be in circumstances where pollution damage is likely to occur on or after the occurrence of a casualty or event if no extraordinary and immediate measures are taken to reduce the risk of third-party damage or clean up expenses. By way of contrast, cover is not available under the P&I entry merely because the cleaning of the Ship is required before being allowed to enter or leave a port if there is no imminent threat of pollution. Similarly, if hull cleaning is required to enable the Ship to enter a port in order to carry out repairs that should be covered by the Ship’s Hull Policies, such cost will be treated as part of the cost of repairs under the Ship's Hull Policies.

The duty to exercise due diligence to avoid pollutionA Member has a general duty to exercise due diligence to take the steps that are necessary in order to avoid liability arising as a result of known conditions that affect the Ship, which duty includes the duty to minimise pollution risks.49For example, if a harbour tug were to collide with the Ship in port and cause a crack in the hull near to one of the bunker fuel tanks which could deteriorate and cause the escape of bunker fuel if not repaired prior to departure from the port, the Member should repair the damage immediately pursuant to the duty that is imposed on him generally to act as a prudent uninsured and also under Rule 82.1.b and cannot recover the cost of doing so under the P&I insurance as a sue and labour expense.

(I) ...liabilities, costs and expenses incurred by the Member pursuant to any agreement approved by the Association... (Rule 38.1.b)Shipowners may be parties to many different types of contracts or agreements which regulate liability for damage to the environmentinter se, e.g. charterparties, contracts for the use of terminals, bunker supply contracts, salvage agreements, certain standing agreements with oil spill response organisations and agreements that provide for the payment of voluntary compensation in excess of, or in addition to, that which is imposed by international conventions.50

Subject to certain important conditions, cover is available under Rule 38.1.b for such liabilities. As a general rule, such contractual liabilities are covered only if the terms have been previously approved by the Association.51The Association does not need to review all such terms in advance, but Members are encouraged to seek clarification from the Association when in doubt about the scope of cover. This is so even if the terms appear in a standard form charterparty, but this is particularly relevant in the case of agreements with oil spill response organisations, whose terms and conditions vary widely, and may place onerous duties on the Member. For example, reference is made to Gard Circulars Nos. 12 and 16/2012 commenting on difficulties that had been experienced in China resulting in the production by the International Group of P&I Clubs of an amended recommended spill response contract.52

Bunker supply contracts and ‘terms of use’ for terminalsFrom time to time Members may be requested to accept onerous contractual terms and indemnities that are difficult to avoid. For example, a supplier of bunker fuel in a port may require the receivers of the bunker fuel to bear most, if not all, of the risks that are connected with the bunkering operation, including the risk of pollution caused by the sole negligence of the bunker supplier, his servants or agents. Similar onerous terms may be encountered at certain terminals or offshore facilities where permission to load or discharge will not be given unless the shipowner, in his capacity as ‘user’ of the facility, agrees to assume risks that would otherwise be borne by the owner or operator of the facility.

Cover is available for liabilities that arise solely by virtue of such contractual terms only if the terms have been previously approved by the Association. This does not mean that the Club must approve, for example, all bunker supply terms in advance, as this is impractical. However, guidance is provided by the Association concerning risks that should not be assumed without prior consultation.53For example, the transfer to a shipowner from his contractual partner of liabilities that may result from the wilful or intentional misconduct or gross negligence of the contractor’s personnel is not acceptable. Neither is the agreement on the part of the shipowner to waive limitation rights that would otherwise apply.54

Oil spill response agreementsCover is available under Rule 38.1.b in circumstances where Members are legally obliged under the applicable law to enter into contracts for pollution response measures prior to the occurrence of any incident which may cause pollution. In many coastal countries, the relevant local and/or national authorities will take charge of, and draw up contingency plans relating to, ship-source pollution incidents. The same authorities will also usually organise and control clean-up operations following such incidents.

However, in certain countries, such as the USA, measures must be undertaken by the designated Responsible Party, which is usually the shipowner. The US Oil Pollution Act requires shipowners to have a Vessel Response Plan in place for each ship trading to the USA, as well as contracts with a Qualified Individual and an Oil Spill Response Organisation, to enable them to fulfil their obligations in the event of a pollution incident. Cover is available under Rule 38.1.b for the liabilities, costs and expenses that Members incur pursuant to such agreements provided that the relevant liability provisions have been approved by the Association.55

Salvage and wreck removal contractsSalvage and wreck removal agreements usually contain provisions which allocate the risks for pollution damage that may arise during the course of their operations between the shipowner and the salvage company. Cover is available for liabilities that arise under the unamended terms of Lloyd’s Open Form and the BIMCO Form wreck removal contracts but Members who intend to conclude contracts on other terms are advised to consult the Association before doing so.

CharterpartiesThe risk of liability for environmental damage is usually borne by the owners and operators of ships. However, in recent years, charterers have been obliged to bear criminal fines and civil penalties that have been imposed on them by local authorities as a result of oil spills from the vessels that they have chartered.56Consequently, charterparties may now include clauses that are designed to regulate the liability of shipowners and charterersinter sefor pollution liability and charterers may incur liability by virtue of such clauses. Therefore, cover is also available under Rule 38.1.b for Members who are charterers but, unless the terms that impose liability on the charterers for pollution damage are considered to be ‘standard’ terms, there is cover only to the extent that the Association has given its prior approval to the relevant charterparty terms.

STOPIA is a voluntary agreement that is entered into by owners of oil tankers and the 1992 IOPC Fund (the Fund). The purpose of STOPIA is to increase the minimum limit of liability of shipowners for pollution damage caused by the spill of oil from tankers of 29,548 gross tons or less from whichever tonnage-based limit of liability that would otherwise have applied pursuant to the CLC 9258up to SDR 20 million.59 The original STOPIA Agreement was dated 2006 but, pursuant to the periodic review provisions of the Agreement, an amended version entitled STOPIA 2006 (as amended 2017) comes into force on 20 February 2017. The amended version retains most of the provisions of the original 2006 version but includes additional provisions that are intended to protect Members and the Association where, for reasons beyond their control, they are prevented from reimbursing the 1992 Fund as a result of legislation that is designed to protect ship owners and insurers from making payments that would fall within the scope of any applicable sanctions regime.

TOPIA60 See paragraph (v) in (B) above as well as (K) below.

TOPIA is an agreement between the Supplementary Fund and the owners of oil tankers, whether smaller or larger than 29,548 gross tons, which are ‘eligible for entry’ in TOPIA. It determines, in rough terms, that the owner of the oil tanker, and in practice, his P&I club, shall indemnify the Supplementary Fund for 50 per cent of the compensation provided by the Fund for admissible claims etc., made against it. The Fund will pay compensation for admissible claims resulting from pollution damage in countries that are members of the Fund, where such claims exceed the limit of the 1992 Fund. The combined limit of the Supplementary Fund and the CLC/1992 Fund is SDR 750 million.61The original TOPIA Agreement was dated 2006 but, pursuant to the periodic review provisions of the Agreement, an amended version entitled TOPIA 2006 (as amended 2017) comes into force on 20 February 2017. The amended version retains most of the provisions of the original 2006 version but includes additional provisions that are intended to protect Members and the Association where, for reasons beyond their control, they are prevented from reimbursing the Supplementary Fund as a result of legislation that is designed to protect ship owners and insurers from making payments that would fall within the scope of any applicable sanctions regime.

(J) ...A Member shall...be a party to STOPIA... (Rule 38.2)Rule 38.2 emphasises that although STOPIA does not oblige a shipowner to be a member of the agreement, it is a condition of cover for pollution liabilities etc., under Rule 38 that a Member who has entered one or more Ships in the Association that are ‘relevant ships’ for the purpose of STOPIA, (i.e. ships to which STOPIA is designed to apply), shall be a party to STOPIA (which acronym includes any amendment or variation or replacement thereof that may be made from time to time during the Policy Year) for the period of entry of such Ship or Ships in the Association. If the Member is not a party to STOPIA at the time of the pollution incident, cover is not available from the Association for any pollution liability that would otherwise have been available pursuant to Rule 38, i.e. not just for the particular liability that arises pursuant to STOPIA.

The Association may agree in writing to waive this condition (i.e. that cover under Rule 38 is available although the Member shall not be a party to STOPIA) in order to enable it to take into account any special circumstances that may apply to, e.g. to small tankers in purely domestic trade. The Board of Directors of the Association may also exercise its discretion to waive the condition in particular cases where no such written agreement has been made.

(K) ...A Member shall...be a party to TOPIA... (Rule 38.3)Rule 38.3 is similar in effect to Rule 38.2 except that it applies to Members that are insured in respect of Ships that are eligible for entry in TOPIA (which acronym includes any amendment or variation or replacement thereof that may be made from time to time during the Policy Year), as opposed to STOPIA. Such Ships will be all oil tankers to which the CLC 92 applies without an upper size limit. Subject to this distinction, the comments that are made above under (J) apply equally in the context of TOPIA.

Rules 38.2 and 38.3 reflect the fact that the Association has, together with all the other member clubs of the International Group of P&I Clubs, agreed to cover liabilities that arise pursuant to STOPIA and TOPIA and is prepared to indemnify, respectively, the 1992 Fund and Supplementary Fund directly for such liabilities in order to contribute to the efficient implementation and operation of the indemnification mechanisms in STOPIA and TOPIA. This can be achieved only if all Members who have entered Ships which qualify for STOPIA and TOPIA in the Association are required and considered to be parties to STOPIA and TOPIA (whichever applies to the particular Ship) in relation to those Ships.62By so doing, shipowners and their P&I Clubs have volunteered to cover a larger proportion of total ship-source pollution liabilities in order to preserve the balance of contributions between the shipping and oil industries that was originally envisaged in the CLC and Fund Conventions.

1 The International Convention for the Prevention of Pollution from Ships, 1973; its Protocol of 1978, and existing amendments and annexes. 2 The International Convention on Civil Liability for Oil Pollution Damage, 1969; its Protocol of 1992 and existing amendments. 3 The International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001 (the Bunker Convention) entered into force on 21 November 2008. 4 For a more detailed consideration of the history of pollution regulation see the Gard Handbook on Protection of the Marine Environment, 3rd Edition 2006. 5 See Rule 87.1, which is sometimes referred to as the ‘pay-to-be-paid’ principle. 6 The Association, along with the other P&I clubs who are members of the International Group of P&I Clubs, provide similar evidence of insurance to flag states in respect of liabilities arising under the Bunker Convention, as that which has been provided for many years in relation to liabilities arising under the CLC. 7 An example of the wording of a CLC Certificate is provided on page 892 of the Gard Handbook on the Protection of the Marine Environment, 3rd Edition, 2006. 8 See Article VII 8 of the CLC 92. 9 See Rule 2.4.a. 10 This does not apply to liability for contamination or other damage to the Member’s own property. See Rule 50, which does not include pollution liability. 11 Whilst the shipowner who delivered the waste may be the target for claims in respect of such pollution under the applicable law (e.g. under the US Comprehensive Environmental Response, Compensation and Liability Act 1980 (CERCLA)), cover is not available in respect of such liability unless the Association’s Board of Directors exercises its discretion in favour of the Member pursuant to Rule 62.2. The reason for this is that such liability has not occurred in direct connection with the operation of the Ship as required by Rule 2.4.a and possibly not during the period of entry of the Ship in the Association as required by Rule 2.4.c. 12 See Rule 2.4.b. 13 The Association provides special insurance cover for charterers where the option exists to include cover for liability incurred as owner of cargo on a chartered ship. For more information, see www.gard.no. 14 See Rule 2.4.c. 15 See the Guidance to Rule 25.2.c. 16 See Rule 25.6. 17 See Rule 26.2. 18 See Rule 51. 19 See Rule 82. 20 STOPIA is an acronym for Small Tanker Oil Pollution Indemnification Agreement. . 21 TOPIA is an acronym for Tanker Oil Pollution Indemnification Agreement. . 22 Such discretion must be exercised by the Board of Directors. 23 The limits specified in Rules 53.1 and 53.2, and Appendix III do not apply to pollution caused by substances other than oil. 24 Oil companies can operate oil platforms and tankers, and may arrange for comprehensive, integrated insurances that cover, inter alia, third party liability resulting from their operations. Otherwise, see the Guidance to Rule 71 concerning ‘double insurance’. 25 See Rule 38.1.a. 26 See Rule 38.1.b. 27 For detailed Guidance as to the regimes which apply globally and the various voluntary agreements see the Gard Handbook on Protection of the Marine Environment, 3rd Edition 2006, Part IV, Chapter 15. 28 For details of the countries that have ratified these conventions, please consult the IMO register of signatories that can be found on the IMO webside www.imo.org. 29 For example, the United States is not a party to the international conventions which regulate oil pollution but has enacted statutes such as the Federal Water Pollution Control Act (FWPCA), the Comprehensive Environmental Response, Compensation and Liability Act 1980 (CERCLA) and the Oil Pollution Act 1990 (OPA 90). 30 The International Oil Pollution Compensation Supplementary Fund 2003 (Supplementary Fund) is separate and distinct from the International Oil Pollution Compensation Fund 1992 (1992 Fund), although it shares the same secretariat. 21 countries were members of the Supplementary Fund in March 2008. 31 For example, it may prove necessary to cause damage to land areas in order to gain access for any heavy equipment which may be needed to clean an affected coastline or beach. Another source of such liability can be a new incident caused by a party operating under an ‘oil spill response contract’ where the Member has assumed responsibility for such incidents (and the Association has accepted the contract terms). 32 The law of the United States allows compensation to be paid to private or public parties for noneconomic losses resulting from damage to natural resources. For more details, please see the Gard Handbook on the Protection of the Marine Environment, 3rd Edition, 2006, Chapter 9 (pp. 337 – 394). 33 See, for example, Article III, 2 of the CLC 92. 34 See Article VII, 8 of the CLC 92. See also the Guidance to Rule 72. 35 See the Guidance to Rule 58. 36 See footnote 11 above concerning CERCLA liabilities. 37 Discretion in this regard must be exercised by the Board of Directors, because it is intended to make cover available for liabilities etc., in respect of which cover is not available under the Rules. 38 See Rule 40 as concerns cover for wreck removal. 39 See the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, 1996, Article 5. 40 See the Guidance to Rule 73 concerning nuclear perils. 41 The BRAER incident in 1995 is one example. The BRAER, which was loaded with North Sea crude oil grounded off the coast of Shetland in adverse weather and spilled oil. The owner and P&I club received claims from farmers living relatively far away from the casualty site because sea spray containing crude oil had been carried with the wind and soiled property, fields and animals. 42 The CLC gives the owner a right to establish a compensation fund. If he has done so, all claimants whose property and resources located in CLC states have been damaged, are entitled to enforce their claims only against that fund. See Articles V and VI of the CLC 92. 43 See Rule 71.1.a. 44 See the Nordic Marine Insurance Plan 2013, version 2019, section 12-1.45 See Institute Time Clauses Hulls 1.10.83. clause 6.1.1.46 Please see the schedule to Rule 36 comparing the cover provided by various hull terms and conditions.47 See the commentaries to the Nordic Marine Insurance Plan 2013, version 2019, section 12-1.48 See Rule 46.49 See Rules 82.1.b and 82.2.50 See (J) and (K) below concerning STOPIA and TOPIA.

51 See Rule 55. 52 See Gard Circular No. 11/2014. 53 This is done in several ways: through Member Circulars, Insight articles, Loss Prevention alerts and circulars and in direct communications between the Member and/or P&I broker and the Association’s underwriters. 54 This is to ensure that the right to retain Pool cover for large claims is preserved. However, additional cover in respect of liability resulting from onerous contract terms is available under the ‘Comprehensive Carrier’s Cover’ provided by the Association. See www.gard.no for further details. 55 The International Group of P&I Clubs has developed guidelines for the review of oil spill response agreements. Members trading to countries that require such agreements or Members otherwise considering entering into such agreements, should consult the Association so that the Association may ensure that the terms and conditions comply with the guidelines. If they do not, cover may not be available. 56 See, for example, Gard circular No.2/2013 entitled “Australian Pollution Law – Oil Pollution Indemnity Clause for Penalties and Fines” at: http://www.gard.no/ikbViewer/Content/20734835/Member%20Circular%202%202013%20-%20Australian%20pollution%20law%20-%20Oil%20pollution%20indemnity%20clause%20for%20penalties%20and%20fines.pdf 57 Small Tanker Oil Pollution Indemnification Agreement – see footnote 22 above. For further details on STOPIA, see Gard Circular No 8/2004 on www.gard.no, as well as the Gard Handbook on Protection of the Marine Environment, 3rd edition, 2006, pp. 578-581. 58 In June 2015, SDR 20 million was the equivalent of USD 28 million. 59 STOPIA does not apply to tankers that are larger than 29,548 gross tons, because that is the ship size at which the shipowner’s limit of liability under the CLC 92 reaches SDR 20 million. 60 Tanker Oil Pollution Indemnification Agreement – see footnote 22 above. For a detailed commentary on the provisions of TOPIA see Gard Circular No 9/2005, which is available on www.gard.no. See also the Gard Handbook on Protection of the Environment, 3rd edition, 2006, pp. 578-581. 61 In June 2015, SDR 750 million was the equivalent of USD 1.05 billion. 62 A Memorandum of Understanding has been entered into in this regard between the International Group of P&I Clubs on the one part and, collectively, the International Oil Pollution Compensation Fund 1992 and the International Oil Pollution Compensation Supplementary Fund 2003 on the other.

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